The U.S. Supreme Court’s June 22 ruling in Liu v. SEC limited the Securities and Exchange Commission’s (SEC) enforcement powers.

The court ruled 8-1 that the SEC could ask courts to issue disgorgement orders, which require wrongdoers to give up money gathered illegally, with some restrictions. The court held that valid disgorgement orders must be less than or equal to the wrongdoer’s net profits and go toward repaying any victims.

Justice Sonia Sotomayor, writing for the majority, argued, “First, equity practice long authorized courts to strip wrongdoers of their ill-gotten gains, with scholars and courts using various labels for the remedy. Second, to avoid transforming an equitable remedy into a punitive sanction, courts restricted the remedy to an individual wrongdoer’s net profits to be awarded for victims.”

Justice Clarence Thomas wrote in his dissenting opinion that the court should have ruled that disgorgement orders were never allowed. He argued that the relevant law “authorizes the Securities and Exchange Commission (SEC) to seek only ‘equitable relief that may be appropriate or necessary for the benefit of investors,’ and disgorgement is not a traditional equitable remedy.”

The decision in Liu “struck a middle ground, rejecting the broad argument that the SEC could never obtain disgorgement of profits from unlawful activity in securities litigation, but sharply cutting back the remedy as the SEC has envisioned it in recent years,” Columbia Law professor Ronald Mann argued in an article for SCOTUSblog.

“Three years ago, the Supreme Court cast doubt on whether disgorgement was among the remedies the agency could seek in civil lawsuits,” but with Liu the court approved the practice, according to New York Times Supreme Court reporter Adam Liptak.

The court sent the case back down to the Ninth Circuit for another hearing based on the Liu ruling.

To learn more about Liu v. SEC, click here.

Additional reading:

• Administrative state
• Securities and Exchange Commission
• United States Court of Appeals for the Ninth Circuit
• Sonia Sotomayor
• Clarence Thomas (Supreme Court)

Link to the SCOTUS decision:
https://www.supremecourt.gov/opinions/19pdf/18-1501_8n5a.pdf

Link to Mann article:
https://www.scotusblog.com/2020/06/opinion-analysis-justices-accept-but-cabin-secs-right-to-disgorgement-in-securities-litigation/

Link to Liptak article:
https://www.nytimes.com/2020/06/22/us/supreme-court-sec.html